Options Corner

How to use Open Interest in Trading?

Increasing in an uptrend and open interest on the rise is interpreted as new money coming into the market (reflecting new buyers); this is considered bullish.

Now, if the price action is rising and the open interest is on the decline, short sellers covering their positions are causing the rally. Money is therefore leaving the marketplace; this is a bearish sign.

If prices are in a downtrend and open interest is on the rise, traders know that new money is coming into the market, showing aggressive new short selling. This scenario will prove out a continuation of a downtrend and a bearish condition.

Lastly, if the total open interest is falling off and prices are declining, the price decline is likely being caused by disgruntled long position holders being forced to liquidate their positions. Technicians view this scenario as a strong position technically because the downtrend will end once all the sellers have sold their positions. The following chart therefore emerge

Open Interest and Volume:

Open interest is not the same as volume. Volume,on one hand is how many contracts change hands in a day, whereas Open Interest on the other hand tells us how many new contracts have been created in the market.

Volume represents the total amount of trading activity or contracts that have occurred in a given futures contracts or option contract, commodity market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day.

Volume is a count of total units of an instrument traded in a given period of time. For stocks, its number of shares traded, for options and futures its number of contracts traded.

If the volumes increase it does not necessarily mean that the open interest has increased too. You can never know, unless you look at the number of contracts which are openly held by traders.

Following table is a consolidated view of relation between volume and Open Interest.